AEROVIRONMENT, INC. Introduction
The following discussion of our financial condition and results of operations should be read in conjunction with our "Selected Consolidated Financial Data" and our consolidated financial statements and notes thereto included herein as Item 8. This discussion contains forward-looking statements. Refer to "Forward-Looking Statements" on page 2 and "Risk Factors" beginning on page 23, for a discussion of the uncertainties, risks and assumptions associated with these statements. The disclosures and references in this Annual Report, including financial data, management's discussion and analysis of financial condition and results of operation do not include theTelerob Group acquisition, unless otherwise specifically noted. The assets, liabilities and results of operations of theTelerob Group have not been consolidated into our results as of and for the period endedApril 30, 2021 or any of the historical periods presented. OnJune 29, 2018 , we completed the sale of substantially all of the assets and related liabilities of our former EES Business to Webasto pursuant to the Purchase Agreement between Webasto and us. We determined that the EES Business met the criteria for classification as an asset held for sale atApril 30, 2018 and represented a strategic shift in our operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented. Overview
We design, develop, produce, deliver and support a technologically-advanced
portfolio of intelligent, multi-domain robotic systems and related services for
government agencies and businesses. We supply unmanned aircraft systems ("UAS"),
tactical missile systems ("TMS"), unmanned ground vehicles ("UGV") and related
services primarily to organizations within the U.S. Department of Defense
("DoD") and to international allied governments. We derive the majority of our
revenue from these business areas and we believe that the markets for these
solutions offer the potential for significant long-term growth. Additionally, we
believe that some of the innovative potential products, services and
technologies in our research and development pipeline will emerge as new growth
platforms in the future, creating additional market opportunities.
The success we have achieved with our current products and services stems from
our investment in research and development and our ability to invent and deliver
advanced solutions, utilizing our proprietary technologies, to help our
government and commercial customers operate more effectively and efficiently. We
develop these highly innovative solutions by working very closely with our key
customers and solving their most important challenges related to our areas of
expertise. Our core technological capabilities, developed through nearly
50 years of innovation, include robotics and robotics systems autonomy; sensor
design, development, miniaturization and integration; embedded software and
firmware; miniature, low power wireless digital communications; lightweight
aerostructures; high-altitude systems design, integration and operations;
machine vision, machine learning and autonomy; low SWaP (Size, Weight and Power)
system design and integration; manned-unmanned teaming, unmanned-unmanned
teaming; power electronics and electric propulsion systems; efficient electric
power conversion, storage systems and high density energy packaging; controls
and systems integration; vertical takeoff and landing flight, fixed wing flight
and hybrid aircraft flight; image stabilization and target tracking; advanced
flight control systems; fluid dynamics; human-machine interface development; and
integrated mission solutions for austere environments.
Our business focuses primarily on the design, development, production,
marketing, support and operation of innovative UAS and TMS and the delivery of
UAS-related services that provide situational awareness, remote sensing,
multi-band communications, force protection and other information and mission
effects to increase the safety and effectiveness of our customers' operations.
Due to the COVID-19 pandemic, there are currently limitations on international
travel which may limit our ability to obtain international orders and perform
training and other services for our customers. If these travel limitations
continue for an extended period of time, we may experience delays in obtaining
additional international orders.
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Revenue
We generate our revenue primarily from the sale, support and operation of our
UAS and TMS as well as ISR services by our medium UAS. Support for our small UAS
and TMS customers includes training, spare parts, product repair, product
replacement, and the customer-contracted operation of our small UAS by our
personnel. Under ISR services contracts we deliver the information our medium
UAS produce to our customers, who use that information to support their
missions. We refer to these support activities, in conjunction with
customer-funded research and development ("R&D"), as our services operation. We
derive most of our small UAS revenue from fixed-price and cost-plus-fee
contracts with the U.S. government and allied foreign governments.
Cost of Sales
Cost of sales consists of direct costs and allocated indirect costs. Direct costs include labor, materials, travel, subcontracts and other costs directly related to the execution of a specific contract. Indirect costs include overhead expenses, fringe benefits, depreciation of in-service ISR assets, amortization of acquired intangible assets and other costs that are not directly charged
to a specific contract. Gross Margin Gross margin is equal to revenue minus cost of sales. We use gross margin as a financial metric to help us understand trends in our direct costs and allocated indirect costs when compared to the revenue we generate.
Selling, General and Administrative
Our selling, general and administrative expenses ("SG&A"), include salaries and
other expenses related to selling, marketing and proposal activities, and other
administrative costs and amortization of acquired intangible assets. Some SG&A
expenses relate to marketing and business development activities that support
both ongoing business areas as well as new and emerging market areas. These
activities can be directly associated with developing requirements for and
applications of capabilities created in our R&D activities. SG&A is an important
financial metric that we analyze to help us evaluate the contribution of our
selling, marketing and proposal activities to revenue generation.
Research and Development Expense
R&D is an integral part of our business model. We normally conduct significant internally funded R&D. Our R&D activities focus specifically on creating capabilities that support our existing product portfolio as well as new solutions.
Other Income and Expenses
Other income and expenses includes legal accruals related to our former EES Business, a one-time gain from a litigation settlement, income from transition services performed on behalf of the buyer of the discontinued EES Business, interest income, interest expense, and amortization of capital lease payments.
Income Tax Expense
Our effective tax rates are lower than the statutory rates primarily due to R&D
tax credits, foreign derived intangible income tax deduction ("FDII") and excess
tax benefit of equity awards, partially offset by valuation allowances.
Equity Method Investment Loss, Net of Tax
Equity method investment loss, net of tax, includes equity method gain or loss related to theHAPSMobile Inc. joint venture we formed inDecember 2017 with SoftBank Corp and our investment in a limited partnership fund for which we have concluded we have influence for holding more than a minor interest. 57 Table of Contents
Loss from Discontinued Operations, Net of Tax
OnJune 29, 2018 , we completed the sale of substantially all of the assets and related liabilities of our former EES Business to Webasto pursuant to the Purchase Agreement between Webasto and us. We determined that the EES Business met the criteria for classification as an asset held for sale atApril 30, 2018 and represented a strategic shift in our operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests includes the 15% interest in the income or losses of our Turkish joint venture, Altoy.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, inventory reserves for excess and obsolescence, intangible assets acquired in a business combination, goodwill, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting estimates affect our more significant judgments and estimates used in preparing our consolidated financial statements. Please see Note 1 to our consolidated financial statements, which are included in Item 8 "Financial Statements and Supplementary Data" of this Annual Report, for our Organization and Significant Accounting Policies. There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements. Revenue Recognition Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management's estimates change on the basis of development of the business or market conditions. Management judgments and estimates have been applied consistently and have been reliable historically. We believe that there are two key factors which impact the reliability of management's estimates. The first of those key factors is that the terms of our contracts are typically less than six months. The short-term nature of such contracts reduces the risk that material changes in accounting estimates will occur on the basis of market conditions or other factors. The second key factor is that we have hundreds of contracts in any given accounting period, which reduces the risk that any one change in an accounting estimate on one or several contracts would have a material impact on our consolidated financial statements. The substantial majority of our revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related engineering, technical and other services according to customer specifications. These contracts may be fixed price, cost-reimbursable, or time and materials. We account for all revenue contracts in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). A performance obligation is a promise in a contract to transfer distinct goods or services to a customer, and it is the unit of account in ASC 606. A contract's transaction price is allocated to each distinct performance obligation and revenue is recognized when each performance obligation under the terms of a contract is satisfied. For contracts with 58
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multiple performance obligations, we allocate the contract's transaction price to each performance obligation using observable standalone selling prices for similar products and services. When the standalone selling price is not directly observable, we use our best estimate of the standalone selling price of each distinct good or service in the contract using the cost plus reasonable margin approach.
Our performance obligations are satisfied over time or at a point in time. Revenue for TMS product deliveries and Customer-Funded R&D contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue, including ISR services, is recognized over time as services are rendered. We elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity's performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice. Training services are recognized over time using an output method based on days of training completed. For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors' costs, other direct costs, and indirect costs applicable on government and commercial contracts. For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. Our small and medium UAS product sales revenue is composed of revenue recognized on contracts for the delivery of small and medium UAS systems and spare parts. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer. We review cost performance and estimates to complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract's revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. The impact of revisions in the estimated costs to complete for contracts using the over time method are recognized on a cumulative catch-up basis in the period in which the revisions are made. During the fiscal years endedApril 30, 2021 , 2020 and 2019, changes in accounting estimates on contracts recognized using the over time method are presented below. Amounts representing contract change orders or claims are included in revenue if the order or claim meets the criteria of a contract or contract modification in accordance with ASC 606. Incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue and profit rates, and are recorded when there is sufficient information to assess anticipated contract performance. For the years endedApril 30, 2021 , 2020 and 2019, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands): Year Ended April 30, 2021 2020 2019 Gross favorable adjustments$ 1,953 $ 2,181 $ 1,190 Gross unfavorable adjustments (2,205) (2,019) (1,308) Net adjustments$ (252) $ 162 $ (118) For the year endedApril 30, 2021 , favorable cumulative catch up adjustments of$2.0 million were primarily due to final cost adjustments on 12 contracts, which individually were not material. For the same period, unfavorable cumulative catch up adjustments of$2.2 million were primarily related to higher than expected costs on nine contracts. During the year endedApril 30, 2021 , we revised our estimates of the total expected costs to complete a TMS variant contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately$1.0 million . 59 Table of Contents For the year endedApril 30, 2020 , favorable cumulative catch-up adjustments of$2.2 million were primarily due to final cost adjustments on 13 contracts. During the year endedApril 30, 2020 , we revised our estimates of the total expected costs to complete a design and development agreement. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase to revenue of approximately$1.1 million . For the same period, unfavorable cumulative catch-up adjustments of$2.0 million were primarily related to higher than expected costs on seven contracts. During the year endedApril 30, 2020 , we revised our estimates of the total expected costs to complete a TMS contract. The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately$1.4 million . For the year endedApril 30, 2019 , favorable cumulative catch up adjustments of$1.2 million were primarily due to final cost adjustments on nine contracts, which individually were not material. For the same period, unfavorable cumulative catch up adjustments of$1.3 million were primarily related to higher than expected costs on 14 contracts, which individually were not material.
Inventories Reserves for Excess and Obsolescence
Our policy for valuation of inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, an estimate of future demand for products within specific time horizons, valuation of existing inventory, as well as product lifecycle and product development plans. Inventory reserves are also provided to cover risks arising from slow-moving items. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions and record to cost of sales. We may be required to record additional inventory write-downs if actual market conditions are less favorable than those projected by our management.
Intangible Assets - Acquired in Business Combinations
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocate the purchase price of each acquired business to our respective net tangible and intangible assets. Acquired intangible assets include: technology, in-process research and development, customer relationships, licenses, trademarks and tradenames, and non-compete agreements. We use valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions and estimates including projected revenue, gross margins, operating costs, growth rates, useful lives and discount rates. Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed.Goodwill Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We test goodwill for impairment annually during the fourth quarter of the Company's fiscal year or when events or circumstances change in a manner that indicates goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business or political climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends or significant underperformance relative to projected future results of operations. Income Taxes
We are required to estimate our income taxes, which includes estimating our current income taxes as well as measuring the temporary differences resulting from different treatment of items for tax and accounting purposes. We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. Realizing our deferred tax assets principally depends on our achieving projected future taxable income. We may change our
judgments
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regarding future profitability due to future market conditions and other factors, which may result in recording a valuation allowance against those deferred tax assets.
We have various foreign subsidiaries to conduct or support our business outsidethe United States . We do not provide forU.S. income taxes on undistributed earnings for our foreign subsidiaries as management expects the foreign earnings will be indefinitely reinvested in such foreign jurisdictions. Fiscal Periods Our fiscal year ends onApril 30 . Due to our fixed year end date ofApril 30 , our first and fourth quarters each consist of approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. Our first three quarters end on a Saturday. Results of Operations The following table sets forth certain historical consolidated income statement data expressed in dollars (in thousands) and as a percentage of revenue for the periods indicated. Certain amounts may not sum due to rounding. Fiscal Year Ended April 30, 2021 2020 2019 Revenue$ 394,912 100 %$ 367,296 100 %$ 314,274 100 % Cost of sales 230,354 58 % 214,194 58 % 185,871 59 % Gross margin 164,558 42 % 153,102 42 % 128,403 41 %
Selling, general and administrative 67,481 17 % 59,490 16 % 60,343 19 % Research and development 53,764 14 % 46,477 13 % 34,234 11 % Income from continuing operations 43,313 11 % 47,135 13 % 33,826 11 % Interest (expense) income, net (618) - % 4,828 1 % 4,672 1 % Other (expense) income, net (8,330) (2) % 707 - % 11,980 4 % Income from continuing operations before income taxes 34,365 9 % 52,670 14 % 50,478 16 % Income tax expense 539 0 % 5,848 2 % 4,641 1 % Equity method investment loss, net of tax (10,481) (3) % (5,487) (1) % (3,944) (1) % Net income from continuing operations 23,345 6 % 41,335 11 % 41,893 13 % (Loss) gain on sale of business, net of tax - - % (265) - % 8,490 3 % Loss from discontinued operations, net of tax - - % - - % (2,964) (1) % Net income 23,345 6 % 41,070 11 % 47,419 15 % Net (gain) loss attributable to noncontrolling interest (14) - % 4 - % 19 - % Net income attributable to AeroVironment, Inc.$ 23,331 6 %$ 41,074 11 %$ 47,438 15 % 61 Table of Contents The Company operates its business as two reportable segments, Unmanned Aircraft Systems ("UAS") and Medium Unmanned Aircraft Systems ("MUAS"). The UAS segment consists of our existing small UAS, tactical missile systems and HAPS product lines and the recently acquired ISG business. The MUAS segment consists of our recently acquired Arcturus business. The following table (in thousands) sets forth our revenue, gross margin and income (loss) from operations generated by each operating segment for the periods indicated: Fiscal Year Ended April 30, 2021 2020 2019 Revenue: UAS$ 379,075 $ 367,296 $ 314,274 MUAS 15,837 - - Total$ 394,912 $ 367,296 $ 314,274 Gross margin: UAS$ 161,593 $ 153,102 $ 128,403 MUAS 2,965 - - Total$ 164,558 $ 153,102 $ 128,403 Income (loss) from operations UAS$ 45,182 $ 47,135 $ 33,826 MUAS (1,869) - - Total$ 43,313 $ 47,135 $ 33,826
Fiscal Year Ended
Revenue. Revenue for the fiscal year endedApril 30, 2021 was$394.9 million , as compared to$367.3 million for the fiscal year endedApril 30, 2020 , representing an increase of$27.6 million , or 8%. The increase in revenue was due to an increase in product revenue of$22.1 million and an increase in service revenue of$5.5 million . UAS segment revenue increased$11.8 million from fiscal 2020, or 3%, to$379.1 million for the fiscal year endedApril 30, 2021 due to an increase in product deliveries of$21.8 million , partially offset by a decrease in service revenue of$10.0 million . The increase in product deliveries was primarily due to an increase in product deliveries of TMS and small UAS. The decrease in service revenue was primarily due to a decrease in customer-funded R&D primarily associated with a design and development agreement, partially offset by customer-funded R&D primarily associated with TMS. MUAS segment recorded revenue of$15.8 million for the fiscal year endedApril 30, 2021 resulting from our acquisition of Arcturus inFebruary 2021 . Cost of Sales. Cost of sales for the fiscal year endedApril 30, 2021 was$230.4 million , as compared to$214.2 million for the fiscal year endedApril 30, 2020 , representing an increase of$16.2 million , or 8%. As a percentage of revenue, cost of sales remained consistent at 58%. The increase in cost of sales was a result of an increase in product cost of sales of$10.6 million and an increase in service costs of sales of$5.6 million . UAS cost of sales increased$3.3 million to$217.5 million for the fiscal year endedApril 30, 2021 primarily due to an increase in product sales, partially offset by a decrease in service revenues. As a percentage of revenue, UAS cost of sales decreased from 58% to 57%, primarily due to a favorable product mix. MUAS recorded cost of sales of$12.9 million for the fiscal year endedApril 30, 2021 resulting from our acquisition of Arcturus inFebruary 2021 . Cost of sales for fiscal 2021 included$1.7 million and$2.8 million of intangible amortization expense and other related non-cash purchase accounting expense related to increasing the carrying value of certain assets to fair value for MUAS and UAS, respectively, as compared to$2.4 million for UAS in fiscal 2020. Gross Margin. Gross margin for the fiscal year endedApril 30, 2021 was$164.6 million , as compared to$153.1 million for the fiscal year endedApril 30, 2020 , representing an increase of$11.5 million , or 7%. As a percentage of revenue, gross margin remained consistent at 42%. The increase in gross margin was primarily due to an increase in product margin of$11.5 million . UAS gross margin increased$8.5 million to$161.6 million for the fiscal year endedApril 30, 2021 primarily due to an increase in product sales, partially offset by a decrease in service revenues and a favorable mix. As a percentage of revenue, UAS gross margin increased from 42% to 43%, primarily due to a favorable product mix. MUAS gross margin was$3.0 million for the fiscal year endedApril 30, 2021 resulting from our acquisition of Arcturus inFebruary 2021 . 62 Table of Contents
Selling, General and Administrative. SG&A expense for the fiscal year endedApril 30, 2021 was$67.5 million , or 17% of revenue, compared to SG&A expense of$59.5 million , or 16% of revenue, for the fiscal year endedApril 30, 2020 . The increase in SG&A expense was primarily due to an increase in acquisition related expenses of$6.5 million primarily related to the acquisition of Arcturus, ISG and Telerob and an increase in intangible amortization expense of$2.8 million . Research and Development. R&D expense for the fiscal year endedApril 30, 2021 was$53.8 million , or 14% of revenue, compared to R&D expense of$46.5 million , or 13% of revenue, for the fiscal year endedApril 30, 2020 . R&D expense increased primarily due to an increase in development activities regarding enhanced capabilities for our products and development of new product lines. Interest (Expense) Income, net. Interest expense, net for the fiscal year endedApril 30, 2021 was$0.6 million , compared to interest income net of$4.8 million for the fiscal year endedApril 30, 2020 . The increase in interest expense is primarily due to a combination of a decrease in the average interest rates earned on our investments portfolio and a decrease in the average investment balances and an increase in interest expense of$0.9 million resulting from the term debt issued concurrent with the acquisition of Arcturus.
Other (Expense) Income, net. Other expense, net for the fiscal year ended
Income Taxes. Our effective income tax rate was 1.6% for the fiscal year endedApril 30, 2021 , as compared to 11.1% for the fiscal year endedApril 30, 2020 . The decrease in our effective tax rate was primarily due to the decrease in income before income taxes and an increase in certain federal income tax credits. Equity method investment loss, net of tax. Equity method investment loss, net of tax for the fiscal year endedApril 30, 2021 was$10.5 million , as compared to equity method investment loss, net of$5.5 million for the fiscal year endedApril 30, 2020 . The increase was primarily due to a loss of$8.4 million for our proportionate share of theHAPSMobile Inc. joint venture's impairment of its investment inLoon LLC .
Loss on sale of business, net of tax. Loss on sale of business, net of tax for the fiscal year endedApril 30, 2021 was$0 , as compared to$0.3 million for the fiscal year endedApril 30, 2020 . The loss on sale of business, net of tax related to the sale of our former EES Business during the fiscal year endedApril 30, 2019 . We recorded an adjustment related to a settled working capital dispute during the fiscal year endedApril 30, 2020 .
Fiscal Year Ended
Revenue. Revenue for the fiscal year endedApril 30, 2020 was$367.3 million , as compared to$314.3 million for the fiscal year endedApril 30, 2019 , representing an increase of$53.0 million , or 17%. The increase in revenue was due to an increase in product revenue of$44.7 million and an increase in service revenue of$8.3 million . The increase in product revenue was primarily due to an increase in product deliveries of small UAS to customers within theU.S. government and an increase in TMS revenue from customers within theU.S. government, partially offset by a slight decrease in product deliveries of small UAS to international customers. The increase in product deliveries of small UAS included product deliveries of our VAPOR helicopter unmanned aircraft system associated with our acquisition ofPulse Aerospace inJune 2019 . The increase in service revenue was primarily due to an increase in customer-funded R&D work primarily associated with our design and development agreement with HAPSMobile, development efforts for customers within theU.S. government, an increase in other engineering services, and an increase in sustainment activities in support of TMS product deliveries, partially offset by a decrease in customer-funded R&D work associated with TMS and TMS variants. Cost of Sales. Cost of sales for the fiscal year endedApril 30, 2020 was$214.2 million , as compared to$185.9 million for the fiscal year endedApril 30, 2019 , representing an increase of$28.3 million , or 15%. The increase in cost of sales was a result of an increase in product cost of sales of$25.6 million and an increase in service costs of sales of$2.7 million . The increase in product costs was primarily due to the increase in product deliveries and an increase of$2.5 63 Table of Contents million in intangible asset amortization expense associated with our acquisition ofPulse Aerospace inJune 2019 . The increase in service costs of sales was primarily due to the increase in service revenue, partially offset by a favorable service mix. As a percentage of revenue, cost of sales decreased from 59% to 58%, primarily due to an increase in the proportion of product sales to total revenue and a favorable service mix, partially offset by acquired intangible asset amortization expense. Gross Margin. Gross margin for the fiscal year endedApril 30, 2020 was$153.1 million , as compared to$128.4 million for the fiscal year endedApril 30, 2019 , representing an increase of$24.7 million , or 19%. The increase in gross margin was primarily due to an increase in product margins of$19.0 million and an increase in service margins of$5.7 million . The increase in product margins was primarily due to the increase in product deliveries, partially offset by an increase of$2.5 million in intangible asset amortization expense associated with our acquisition ofPulse Aerospace inJune 2019 . The increase in services margins was primarily due to the increase in services revenue and a favorable service mix. As a percentage of revenue, gross margin increased from 41% to 42%, primarily due to an increase in the proportion of product sales to total revenue and a favorable service mix, partially offset by acquired intangible asset amortization expense. As a percentage of revenue, product gross margin for fiscal 2020 decreased by nearly 70 basis points to 46%. We anticipate product margin in fiscal year 2021 to continue to decline primarily due to an unfavorable product mix. Selling, General and Administrative. SG&A expense for the fiscal year endedApril 30, 2020 was$59.5 million , or 16% of revenue, compared to SG&A expense of$60.3 million , or 19% of revenue, for the fiscal year endedApril 30, 2019 . The decrease in SG&A expense was primarily due to a$4.4 million impairment charge related to the long-lived assets of our commercial Quantix product during the fiscal year endedApril 30, 2019 , a decrease in corporate development expenses primarily related to the sale of our EES Business and a decrease in costs incurred related to the transition services agreement with Webasto, partially offset by an increase in employee-related expenses and an increase in commission expenses associated with an increase in the number of international small UAS contracts under which we utilized sales agents. Research and Development. R&D expense for the fiscal year endedApril 30, 2020 was$46.5 million , or 13% of revenue, compared to R&D expense of$34.2 million , or 11% of revenue, for the fiscal year endedApril 30, 2019 . R&D expense increased primarily due to increased development activities for certain strategic initiatives. Interest Income, net. Interest income, net for the fiscal year endedApril 30, 2020 was$4.8 million , compared to$4.7 million for the fiscal year endedApril 30, 2019 . The increase in interest income was primarily due to an increase in the average interest rates earned on our investments portfolio, partially offset by a decrease in our investments balances. Due to the significant decline in market interest rates combined with a shift in our investment composition towardsU.S. government andU.S. government agency securities during the fourth quarter of fiscal year 2020, we anticipate interest income earned on our investments portfolio to decrease in future periods. Other Income (Expense), net. Other income, net for the fiscal year endedApril 30, 2020 was$0.7 million , as compared to other income, net of$12.0 million for the fiscal year endedApril 30, 2019 . The decrease in other income, net was primarily due to a one-time litigation settlement during the fiscal year endedApril 30, 2019 and a decrease in income earned under a transition services agreement with Webasto, the buyer of our former EES Business. Income Taxes. Our effective income tax rate was 11.1% for the fiscal year endedApril 30, 2020 , as compared to 9.2% for the fiscal year endedApril 30, 2019 . The increase in our effective tax rate was primarily due to decrease in excess tax benefits from the vesting of employee equity awards and a lower proportion of R&D expense which qualifies for R&D tax credits. Equity method investment loss, net of tax. Equity method investment loss, net of tax for the fiscal year endedApril 30, 2020 was$5.5 million , as compared to equity method investment loss, net of$3.9 million for the fiscal year endedApril 30, 2019 . The increase was primarily due to the equity method loss associated with our investment in the HAPSMobile joint venture formed inDecember 2017 . 64 Table of Contents
(Loss) gain on sale of business, net of tax. Loss on sale of business, net of tax for the fiscal year endedApril 30, 2020 was$0.3 million , as compared to gain on sale of business, net of tax of$8.5 million for the fiscal year endedApril 30, 2019 . The gain on sale of business, net of tax for the prior year period resulted from the sale of our former EES Business during the fiscal year endedApril 30, 2019 . We recorded an adjustment related to a settled working capital dispute during the fiscal year endedApril 30, 2020 . Loss from discontinued operations, net of tax. Loss from discontinued operations, net of tax for the fiscal year endedApril 30, 2020 was$0 , as compared to$3.0 million for the fiscal year endedApril 30, 2019 . The loss from discontinued operations, net of tax for the prior year period related to the results of our EES Business prior to the sale.
Liquidity and Capital Resources
OnFebruary 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into a Credit Agreement for (i) a five-year$100 million revolving credit facility, which includes a$10 million sublimit for the issuance of standby and commercial letters of credit, and (ii) a five-year amortized$200 million term A loan (together the "Credit Facilities"). The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus acquisition. Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of$5.0 million as ofApril 30, 2021 . As ofApril 30, 2021 , approximately$95.0 million was available under the Revolving Facility. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes. Refer to Note 12-Debt to our financial statements for further details. OnMay 3, 2021 , the Company paid €37,455,398.11 (approximately$45.4 million ) in cash to purchase Telerob, less (a) €3,000,000 (approximately$3.6 million ) to be held in escrow. Funding for the acquisition came from existing sources of liquidity, Credit Facilities, and cash flows from operations. Refer to Note 24-Subsequent Events to our financial statements for further details. We anticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities including those provided by our recent acquisitions of Arcturus, ISG and Telerob. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure requirements, future obligations related to the recent acquisitions and obligations under the Credit Facilities during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or draw on our Credit Facilities. We anticipate that existing sources of liquidity, Credit Facilities, and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future. Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, marketing acceptance and adoption of our products and services and financing our acquisition of Telerob. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Facility agreement. In addition, we may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.
Our working capital requirements vary by contract type. On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed-price
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contracts, we typically are paid as we deliver products, and working capital is
needed to fund labor and expenses incurred during the lead time from contract
award until contract deliveries begin.
To date, COVID-19 has not had a significant impact on our liquidity, cash flows
or capital resources. However, the continued spread of COVID-19 has led to
disruption and volatility in the global capital markets, which, depending on
future developments, could impact our capital resources and liquidity in the
future. In consideration of the impact of the COVID-19 pandemic, we continue to
hold a significant portion of our investments in cash and cash equivalents and
U.S. government and U.S. government agency securities.
Although not material in value alone or in aggregate, during the fiscal year
ended April 30, 2021 , we made certain commitments outside of the ordinary course
of business, including capital contributions of $2.7 million to a limited
partnership fund. Under the terms of the limited partnership agreement, we have
committed to make capital contributions totaling $10.0 million to the fund of
which $2.4 million was remaining at April 30, 2021 .
Cash Flows
The following table provides our cash flow data from continuing operations for
the periods ended:
Fiscal Year Ended April 30,
2021 2020 2019
(In thousands)Net cash provided by operating activities$ 86,532 $ 25,097 $ 26,946 Net cash (used in) provided by investing activities$ (378,771) $ 59,167 $ 11,546 Net cash provided by (used in) financing activities$ 194,160 $ (1,830) $ (1,184) Cash Provided by Operating Activities. Net cash provided by operating activities for the fiscal year endedApril 30, 2021 increased by$61.4 million to$86.5 million , compared to net cash provided by operating activities of$25.1 million for the fiscal year endedApril 30, 2020 . This increase in net cash provided by operating activities was primarily due to an increase in the cash provided as a result of changes in operating assets and liabilities of$66.9 million largely resulting from increases in accounts receivable and unbilled retentions and receivables due to year over year timing differences, partially offset by decreases in inventory primarily due to year over year timing differences in purchases to support anticipated product deliveries, and decreases in prepaid expenses and other assets due to year over year timing differences, and an increase in non-cash expenses of$12.5 million primarily due to an increase in depreciation and amortization and loss from equity method investments. Net cash provided by operating activities for the fiscal year endedApril 30, 2020 decreased by$1.8 million to$25.1 million , compared to net cash provided by operating activities of$26.9 million for the fiscal year endedApril 30, 2019 . This decrease in net cash provided by operating activities was primarily due to a decrease in the cash provided as a result of changes in operating assets and liabilities of$2.5 million largely resulting from decreases in accounts receivable due to year over year timing differences, partially offset by increases in inventory primarily due to year over year timing differences in purchases to support anticipated product deliveries, increases in unbilled retentions and receivables due to year over year timing differences in revenue and related billings, and decreases in accounts payable due to year over year timing differences, partially offset by an increase in non-cash expenses of$1.3 million primarily due to an increase in depreciation and amortization and loss from equity method investments. Cash (Used in) Provided by Investing Activities. Net cash used in investing activities increased by$437.9 million to$378.7 million for the fiscal year endedApril 30, 2021 , compared to net cash provided by investing activities of$59.2 million for the fiscal year endedApril 30, 2020 . The increase in net cash used in investing activities was primarily due to the acquisitions of Arcturus and ISG, net of cash for$385.6 million in fiscal year endedApril 30, 2021 and a decrease in redemptions of available-for-sale investments net of purchases. During the fiscal years endedApril 30, 2021 and 2020, we used cash to purchase property and equipment totaling$11.3 million and$11.2 million , respectively. 66 Table of Contents Net cash provided by investing activities increased by$47.6 million to$59.2 million for the fiscal year endedApril 30, 2020 , compared to net cash provided by investing activities of$11.5 million for the fiscal year endedApril 30, 2019 . The increase in net cash provided by investing activities was primarily due to higher net redemptions of available-for-sale investments of$92.0 million and held-to-maturity investments of$15.4 million , partially offset by the proceeds received from the sale of the EES Business in the amount of$32.0 million in the first quarter of fiscal 2019, and the cash used to purchasePulse Aerospace, LLC during fiscal 2020, in the amount of$18.6 million . During the fiscal years endedApril 30, 2020 and 2019, we used cash to purchase property and equipment totaling$11.2 million and$8.9 million , respectively. Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities increased by$196.0 million to$194.2 million for the fiscal year endedApril 30, 2021 , compared to net cash used in financing activities of$1.8 million for the fiscal year endedApril 30, 2020 . The increase in net cash provided by financing activities was primarily due to the proceeds of long-term debt of$200.0 million , partially offset by payment of debt issuance costs
of$3.9 million . Net cash used in financing activities increased by$0.6 million to$1.8 million for the fiscal year endedApril 30, 2020 , compared to net cash used in financing activities of$1.2 million for the fiscal year endedApril 30, 2019 . The increase in net cash used by financing activities was primarily due to the payment of contingent consideration of$0.9 million related to the purchase
ofPulse Aerospace, LLC . Contractual Obligations The following table describes our commitments to settle contractual obligations as ofApril 30, 2021 : Payments Due By Period (2) Less Than More Than Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years (In thousands) Operating lease obligations$ 28,823 $ 6,711 $ 9,681 $ 5,859 $ 6,572 Purchase obligations(1) 58,717 58,717 - - - Long-term debt obligations 200,000 10,000
20,000 170,000 - Total$ 287,540 $ 75,428 $ 29,681 $ 175,859 $ 6,572
(1) Consists of all cancelable and non-cancelable purchase orders as of
2021.
(2) Not included in the table above is an additional capital contribution of
million committed under the terms of a limited partnership agreement.
Off-Balance Sheet Arrangements
As of
Inflation
Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.
Recently Adopted Accounting Standards
EffectiveMay 1, 2020 , the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, along with several additional clarification ASU's issued during 2018 and 2019, collectively "CECL". CECL requires the reporting entity to estimate expected credit losses over the life of a financial asset. CECL requires the credit loss to be recognized upon initial recognition of the financial asset. ASU 2016-13 requires the entity to adopt CECL using the modified retrospective transition approach through a cumulative-effect adjustment to the opening balance of retained earnings in 67
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the period of adoption. As part of the assessment of the adequacy of the Company's allowances for credit losses, the Company considered a number of factors including, but not limited to, customer credit ratings, age of receivables, and expected loss rates. However, the adoption of CECL did not have a material impact to retained earnings for the Company.
EffectiveMay 1, 2020 , the Company adopted ASU 2018-15, "Intangibles-Goodwill andOther- Internal-Use Software (Subtopic 350-40) Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). ASU 2018-15 provides guidance on the treatment of accounting for fees paid by a customer in a cloud computing arrangement. This guidance includes the requirements for capitalizing implementation costs incurred in a hosting arrangement. The Company adopted ASU 2018-15 using the prospective method, applying the new guidance to all implementation costs incurred after adoption. The adoption of ASU 2018-15 did not have an impact on the Company's consolidated financial statements. New Accounting Standards InDecember 2019 , the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The guidance is effective for fiscal years beginning afterDecember 15, 2020 and interim periods therein, with early adoption permitted. The adoption method is dependent on the specific amendment included in this update as certain amendments require retrospective adoption, modified retrospective adoption, an option of retrospective or modified retrospective, and prospective adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements. InJanuary 2020 , the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (Topic 321, Topic 323, and Topic 815). This ASU clarifies accounting certain topics impacted by Topic 321Investments-Equity Securities . These topics include measuring equity securities using the measurement alternative, how the measurement alternative should be applied to equity method accounting, and certain forward contracts and purchased options which would be accounted for under the equity method of accounting upon settlement or exercise. The guidance is effective for fiscal years beginning afterDecember 15, 2020 and interim periods therein, with early adoption permitted. The amendments should be adopted prospectively. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.
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